In this week’s Required Readings from your course textbook, you have a specific and detailed example of the use of foreign exchange options to hedge an anticipated but not committed purchase of inventory using a cash flow hedge (Case 3 on Pages 577-579), and a specific and detailed example of the use of foreign exchange options to hedge an unrecognized foreign currency firm commitment using a fair value hedge (Case 2 on Pages 573-577).
It is important for you to demonstrate your understanding of the accounting rules and resulting journal entries that surround these concepts, as especially for multinational corporations, each must determine on an almost a daily basis the impact on their financial statements of these types of foreign currency-related transactions.
Create your own specific and detailed example of either one of these types of foreign exchange options from the beginning of the use of an option to the end of the use or the settlement of the option. Show the journal entries required at each respective date, including an explanation of the basis of each of your journal entry calculations and the authoritative support for each entry following the US GAAP. Make sure your journal entries are clear with regards to which financial statement account is affected by each of your journal entries (balance sheet, income statement, Other Comprehensive Income, etc.).